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Method to calculate income tax based on your salary

Depending on their salary, individuals fall under different tax slabs. Income Tax can be defined as a percentage of an individual’s income that is directly paid to the government. It is mandatory for eligible individuals to file their Income Tax Returns (ITR). The income tax amount that must be paid by you depends on your salary as well as the tax slab you fall under. Heavy penalties are levied in case individuals do not file their returns on time.

It is vital that you calculate the exact amount of income you receive in a month in order to calculate the income tax that you will be paying. Apart from the income, you must also calculate the investments that have been made as well as the deductions.

What is the procedure to calculate income tax?

The procedure to calculate income tax is mentioned below:

  • First, it is important that you calculate all the income that you make. In case you own a house and receive rent or you are receiving an income from capital gains, they must be added to the salary when calculating the overall income.
  • Next, you must deduct the earnings that offer tax benefits from the income that you have earned. Investments made in Public Provident Fund (PPF), Employees Provident Fund (EPF), profits that you make from equity shares, etc., are examples of earnings that offer tax benefits.
  • It is vital that you check your salary slip for all the components that are non-taxable and taxable. The main components that are present in the salary slip are mentioned below:
    • Basic salary
    • Commissions and bonuses
    • Allowances (allowances can be totally, partially, or fully exempt from tax)

Allowances that are fully exempt: Under this component, allowances that are paid for Supreme Court and high court judges, foreign allowance, etc., are included.

Allowances that are partly taxable: Under this category, entertainment allowance, House Rent Allowance (HRA), and any other special allowances are included.

Allowances that are fully taxable: City compensatory allowance for metros, Overtime Allowance (OA), and Dearness Allowance are included under this category.

Given below is an example of how taxable income is calculated based on the salary:

Components

Income from salary (Rs.)

Exempted from tax (Rs.)

Taxable income (Rs.)

Basic Pay

6,00,000

6,00,000

HRA

2,00,000

1,20,000

80,000

Leave Travel Allowance

15,000

9,000

6,000

Special allowances

45,000

45,000

Gross Total

8,60,000

1,29,000

7,31,000

Calculation of HRA is based on the below-mentioned conditions:

  • The actual rent that is being paid minus 10% of the basic pay
  • The actual HRA
  • 40% of the basic pay that is being received. Therefore, 40% of Rs.6 lakh is Rs.2.4 lakh.

In case the actual rent that is being paid is Rs.15,000 per month, the rent that is being paid per year is Rs.1.8 lakh. However, 10% of the basic pay is Rs.60,000. Therefore, the lowest amount of tax exemption is Rs.1.8 lakh minus Rs.60,000, which is Rs.1.2 lakh.

What are the steps that must be followed to find out the tax slab you fall under?

The steps to follow to determine the tax slab you fall under are mentioned below:

  • First, you must calculate the gross salary by adding the Special Allowance, Transport Allowance, HRA, and Dearness Allowance to the basic pay that you receive.
  • Next, you must deduct all exemptions such as standard deduction, professional tax, and HRA from the gross salary.
  • Next, you must add all the additional income that you make such as bonus, interest, commissions, fees, income from rent, and income from capital gains to the gross salary.
  • Next, you must deduct any tax exemptions that you receive under Section 80D and 80C for investments that have been made.
  • The final figure after all deductions is your net taxable income. This figure can be used to determine the tax slab you fall under.

What are the various tax benefits that are offered?

The various tax benefits that are offered are mentioned below:

  • Under Section 80C of the Income Tax Act, 1961, individuals can avail tax benefits of up to Rs.1.5 lakh. Various tax-saving instruments that fall under Section 80C are the PPF scheme, life insurance plans, National Pension System (NPS), etc.
  • Under Section 80D of the Income Tax Act, you can claim tax deductions of up to Rs.25,000 on medical insurance that was paid by you during the financial year.
  • Under Section 80TTA, individuals can claim tax benefits of up to Rs.10,000 for the interest that has been received from a savings account.

Example of calculating income tax

The formula to calculate the taxable income is the gross income minus the deductions and the expenses. Given below is an example of how income tax is calculated based on an individual’s salary.

Assumptions

  • Salary: Rs.8,00,000
  • Income received from a savings account: Rs.8,000
  • Interest generated from Fixed Deposits (FD): Rs.10,000
  • Medical insurance: Rs.8,000
  • Premium paid towards a life insurance policy: Rs.60,000
  • Investment towards PPF: Rs.50,000
  • Investment toward ELSS funds: Rs.40,000

The gross total income of the individual is mentioned in the table below:

Type of income

Amount that is received (Rs.)

Salary

8,00,000

Interest generated from savings (FD and savings account)

18,000

Gross total income

8,18,000

Tax benefits that can be availed for the investments in various schemes are mentioned in the table below:

Tax Deductions

Deducted amount (Rs.)

80C (LIC, PPF, ELSS)

1,50,000

80TTA (Medical Insurance)

8,000

80D (Savings account)

8,000

Total

1,64,000

Therefore, the gross taxable income of the individual is Rs.8,18,000 – Rs.1,64,000 = Rs.6,54,000

The tax slab for the FY 2018-2019, for an individual who is less than the age of 60 years is mentioned in the table below:

Tax Slab

Tax deductions

Income tax payable

Up to Rs.2,50,000

Exempted from paying tax

0

From Rs.2,50,000 to Rs.5,00,000

5% of (Rs.5,00,000 minus Rs.2,50,000)

Rs.12,500

From Rs.5,00,000 to Rs.10,00,000

20% of (Rs.6,54,000 minus Rs.5,00,000)

Rs.30,800

Above Rs.10,00,000

30% (nil)

0

Cess

4% of the total tax (4% of Rs.43,300)

Rs.1,732

Total

Rs.12,500 + Rs.30,800 + Rs.1,732

Rs.45,032

Therefore, the income tax that must be paid by the individual is Rs.45,032. Website like Bankbazaar provides information on how to calculate taxable income on salary in details.

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